NISM-Series-VI: Depository Operations · Depository and its Business Partners

Depositories Act 1996 and SEBI Depository Regulations

Updated 11 October 2026 · Fact-checked

The Depositories Act, 1996 gives the legal basis for holding securities in electronic form and transferring them by book entry. SEBI regulates depositories and participants under the SEBI (Depositories and Participants) Regulations, 2018. Depositories frame bye-laws and business rules, which need SEBI's approval. Solve questions by identifying who makes, approves or follows each rule.

Understand Regulatory Framework: Depositories Act and SEBI Regulations

Before 1996, shares were held as paper certificates. Transfer meant physical delivery, signatures and registration. This caused delay, forgery and bad delivery. The Depositories Act, 1996 fixed this by creating a legal framework for dematerialised securities and for depositories that hold them.

The Act does several key things. It allows securities to be held in electronic form and transferred by book entry. It lets a depository be registered as the registered owner on the issuer's records, while the investor stays the beneficial owner. It also lets an investor opt out of the depository and take certificates back, which is rematerialisation. The Act also lays down the rights of the beneficial owner and the duties of issuers, depositories and participants.

The Act works with SEBI's rules. The SEBI (Depositories and Participants) Regulations, 2018 cover how depositories get registered, what they must do, and how depository participants (DPs) are registered and conduct business. They also cover record keeping, client dealing, inspection and action for violations. Do not memorise every clause for the exam. Know the structure and who does what.

There are two layers of rules inside each depository. Bye-laws deal with the depository's own governance and its relationship with participants, issuers and beneficial owners. Business rules (operating instructions) deal with day-to-day procedures. Both are made by the depository and need SEBI approval before they take effect. A DP must follow them as part of its agreement with the depository.

SEBI is the regulator at the top. It registers depositories, approves their bye-laws, and can inspect, investigate and penalise. The depository in turn monitors its DPs. This gives a chain of oversight: SEBI over depositories, and depositories over DPs.

Key formulas to remember

Legal basis: Depositories Act, 1996 = law for demat holding and book-entry transfer; Enacted by Parliament. It is the parent law for depositories in India.
Regulations: SEBI (Depositories and Participants) Regulations, 2018; Made by SEBI. They govern depositories, DPs and related conduct.
Two owners: Depository = registered owner; Investor = beneficial owner; Voting and economic benefits belong to the beneficial owner. The depository does not have the right to vote or benefits of the securities.
Rule hierarchy: Act → SEBI Regulations → Bye-laws → Business rules; Lower rules cannot conflict with the higher ones.
Approval of rules: Depository makes bye-laws and business rules → SEBI approves; Changes also need SEBI's approval before they apply.
Oversight chain: SEBI → Depository → DP → Beneficial owner; Each level monitors the next.

How to solve Regulatory Framework: Depositories Act and SEBI Regulations questions

Use this method for any question on the Act, regulations, bye-laws or business rules.

1Read the stem and mark the subject: the Act, SEBI regulations, bye-laws, business rules or oversight.
2Ask who makes the rule: Parliament, SEBI or the depository.
3Ask who must follow it: depository, DP, issuer, investor.
4Check whether the question is about registered owner or beneficial owner. Match rights to the beneficial owner.
5Check for approval wording. Bye-laws and business rules need SEBI approval.
6Eliminate options that put a lower rule above a higher one or swap the roles of SEBI and the depository.
7Watch absolute words such as always, only and never. Choose the option that fits the legal structure.

Quickest way: Who makes it, who follows it

When to use it: Use for one-line MCQs on legal sources, roles and approvals when time is short.

Fix the ladder in mind: Act, Regulations, Bye-laws, Business rules.
Link each rung to its maker: Parliament, SEBI, depository, depository.
Link approval: depository rules go to SEBI.
Link ownership: depository is registered owner, investor is beneficial owner.
Pick the option that matches, and skip options that reverse any link.

Common mistakes in Regulatory Framework: Depositories Act and SEBI Regulations

Saying the depository is the beneficial owner of the securities.
The securities sit in the depository's system, so students assume it owns them.
Fix: The depository is the registered owner on the issuer's books. The investor is the beneficial owner and enjoys the rights and benefits.
Thinking bye-laws and business rules are made by SEBI.
SEBI approves them, so students assume SEBI writes them.
Fix: The depository frames them. SEBI approves them.
Mixing the Act and the Regulations.
Both are called the legal framework and appear together in the syllabus.
Fix: The Act is passed by Parliament. The 2018 Regulations are made by SEBI under the powers it holds. Keep the maker clear.
Treating bye-laws and business rules as the same thing.
Both are internal rules of the depository.
Fix: Bye-laws cover governance and legal relationships. Business rules cover operating procedures.
Believing the Act removes the investor's choice to hold paper certificates.
Students link the Act only with demat.
Fix: The Act also provides for rematerialisation, so an investor can opt out of the depository and receive certificates.
Quoting older regulations as the current framework.
Older study notes still refer to the 1996 Regulations.
Fix: Remember the framework as the SEBI (Depositories and Participants) Regulations, 2018.

Worked examples

Example 1

Which of the following correctly describes the position of a depository and an investor under the Depositories Act, 1996? (A) Both are beneficial owners (B) Depository is registered owner, investor is beneficial owner (C) Depository is beneficial owner, investor is registered owner (D) Neither has any ownership status

Show the solution

The Act lets securities be held in demat form and transferred by book entry.
For this, the depository's name is entered in the issuer's register as the registered owner.
The investor keeps the economic benefits and rights, so the investor is the beneficial owner.
Option A is wrong because the depository does not hold the benefits. Option C reverses the roles. Option D ignores the Act.

Answer: (B) Depository is registered owner, investor is beneficial owner.

Example 2

A depository wants to change one of its bye-laws. Who must approve the change, and who frames the rule? (A) SEBI frames, depository approves (B) Parliament frames, SEBI approves (C) Depository frames, SEBI approves (D) DP frames, depository approves

Show the solution

Bye-laws are the depository's own rules on governance and relationships.
So the depository frames them.
Such rules and any changes need SEBI's approval before they apply.
Option A reverses the roles. Option B gives the role to Parliament, which makes the Act. Option D wrongly makes a DP the author.

Answer: (C) Depository frames the bye-law and SEBI approves it.

Exam tips

Learn the maker-and-approver pairs. Questions often swap SEBI and the depository.
Expect direct questions on registered owner versus beneficial owner. Do not mix them.
Know the name and year of both the Act and the Regulations. Options may use wrong years.
NISM-Series-VI has negative marking of 25% of the marks assigned to a question, so skip a question only if you cannot eliminate any option.
Distinguish bye-laws from business rules. A statement about procedures usually points to business rules.

Practice questions from Depository and its Business Partners

Regulatory Framework: Depositories Act and SEBI Regulations: frequently asked questions

What is the Depositories Act, 1996?

It is the law that allows securities to be held in electronic form and transferred by book entry. It also sets out the legal position of depositories, participants, issuers and beneficial owners.

What do the SEBI (Depositories and Participants) Regulations, 2018 cover?

They govern the registration and conduct of depositories and depository participants. They also deal with obligations, records, inspections and action for violations.

What is the difference between bye-laws and business rules?

Bye-laws deal with a depository's governance and its legal relationship with participants, issuers and beneficial owners. Business rules set out day-to-day operating procedures. Both are framed by the depository and need SEBI's approval.

Who supervises depository participants?

SEBI is the main regulator and the depository also monitors its participants. A DP must follow the regulations, the bye-laws, the business rules and its agreement with the depository.